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December 13, 2006
High-Wage Protectionism
Russell Roberts
In an earlier post, I discussed Dean Baker's point that there are trade barriers that keep out foreign competition for high-skilled jobs. He claims that if these barriers were lifted, then those artificially high wages would fall, prices would fall for those services using those high-skilled workers and lower-skilled workers would then get a boost in their standard of living. He points out that economists spend more time fighting against the barriers to the imports of manufactured products (which protect low-skill workers' wages) than they do fighting barriers to imports of foreign workers who might provide services.
I think he's right on the first part (the economics) and partly right on the second part (about economists' efforts). We don't spend much time making the case for allowing foreign students access to U.S. medical schools or law schools. But that's because U.S. medical schools and law schools and licensing restrictions make it hard for AMERICANS to get access to those professions along with foreigners. Economists going back to Milton Friedman and Kuznets and Reuben Kessel in the 1940s and 1950s were making this point but it's a general point not particular to international trade. I'm certainly opposed to those restrictions as are most "free-trade" economists. The proponents of those restrictions are economists and others who worry about protecting consumers from "unqualified" professionals. They are the allies, witting or unwitting, of the doctors and lawyers who want to keep their incomes high.
But Dean Baker has more to say on other types of restrictions. The question is whether they are empirically significant—the role of green cards and so on.
I certainly agree with him that competition in the high-wage sector from foreign sources is a good thing. That includes outsourcing, more open immigration and fewer licensing restrictions. Here is his argument in full (I have corrected a few typos), taken from a comment to the earlier post. I have closed the comments there, so if you want to keep this discussion going, please comment on this post.
Okay, let's try this again -- I'll try to talk slowly this time. I was referring to a wide variety of professions, not just economists. Some of these professions (e.g. law and medicine) have very specific training and licensing requirements. For these professions, it would be necessary to tell students in developing countries exactly what courses they would have to take and exams they would have to pass to meet our standards. This is not true in the case of some other professions, such as economists, as folks on this blog have been quick to note.
The second part of this story is that it is essential to remove the requirements concerning efforts by employers to first hire U.S. citizens or green card holders. Any guesses what these requirements mean? I know that they are not well-enforced, but they are meant to prevent competition based on price. Even if employers essentially cheat (I don't think anyone has ended up in jail for failing to be conscientious on this) the law is effective in preventing a Wal-Mart university, law firm, or hospital, that hires whole staffs of foreign professionals at half the prevailing wage in the U.S. (which would still be a huge pay increase for professionals coming from the developing world).
Finally, the relevant issue is not the supply from the developing world of qualified professionals today. The question is what the supply of qualified professionals from the developing world be in 10 years, if we changed the rules to allow Wal-Mart employers of professionals today (or if we had free-traders designing our trade policy 10 years ago). Businesses always tell us how they need assurances of stable rules and tax policy if they are going to undertake long-term investments. That is why NAFTA and other trade pacts have long sections on investment -- they want to ensure U.S. firms that if they set up manufcaturing operations in Mexico that the business will not be expropriated, that they will not be restrictions on repatriating profits, and that there will not be tariffs or other barriers imposed at some future point to prevent the output from being exported to the United States.
Students in Mexico need the same guarantees. They are not going to take years to study U.S. law and mastering English, unless they know that they will be able to compete on an equal footing with U.S. professionals and that Wal-Mart employees will be free to hire them without obstruction.
This situation did not exist in Mexico or anywhere else 10 years ago, and it doesn't exist today, which is why economists and other highly paid professionals still get such oversized paychecks.
I know that all the "free trade" economists will say that they support this sort of free trade for professionals, but I have never once seen a column in a newspaper or magazine complaining about the protectionist barriers that maintain high salaries for professionals, nor have I ever seen a textbook that highlights this porfessional protectionism. Nor have I ever seen an articles that have sought to estimate the potential gains from eliminating the barriers that protect U.S. professionals (references anyone?)
It seems that the "free trade" economists only get upset about the relatively small barriers that still provide some protection for manufacturing workers. Apparently, they can't even see the barriers that keep their own wages high.
Posted by Russell Roberts in Standard of Living | Permalink
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Comments
Huh? Professional outsourcing happens all the time. Teams of analysts are working in India, Singapore, etc. Computer programmers, economists, etc, all have more opportunities in their home countries now than they ever have.
You don't need to live in the US to compete with the professional services of a US resident.
Posted by: JoshK | Dec 13, 2006 9:59:58 AM
If you want to open the medical profession to foreign-trained doctors, removal of licensing is not the correct first step. Instead, you should first insist that health care consumers directly pay for consumption.
When consumers - who are also voters - do not directly pay, there is no incentive to demand anything less than the most qualified care. Strict licensing and medical school accreditation are, to consumers, acceptable means for guaranteeing high quality care.
One likely reason doctors are trusted, and lawyers are deemed to be sharks, is that consumers directly pay for the latter but not the former. As long as physicians remain the most esteemed profession, voters will listen to them and not to economists.
Posted by: JohnDewey | Dec 13, 2006 10:18:11 AM
One interesting part of this debate is that while competition generally lowers prices, it can still make professionals in the US more profitable as a whole while still decreasing the costs for low and middle income wage earners.
I think everyone here can agree that the most effective way to extract the highest profits from a group is to get each person in that group to pay exactly what that service is worth to them this can be done in the professional sector and increase profits for all involved.
Currently the AMA controls admissions to every medical university in the country. By constricting the supply of open positions in schools, the effectively constrict the supply of new Doctors.
IF the AMA removed the restrictions is likely that the number of accepted medical applications and the number of medical schools would both increase. In general we would expect that this increase in the supply of Doctors would decrease the profits of each doctor.
But I think that another scenario is possible:
What if the increase in the supply of Doctors simply encouraged more specialization (Presumably this would be in the group of Med Students that would have been admitted previously) of the top tiered students while allowing the lower end of the spectrum (those students who can now enter the profession because the barriers have been lowered) to focus the more generalized practice of medicine causing a growth in the General Practicioners and doctors of Internal Medicine.
This effect could allow for a new group of professionals (those who would not have been admitted previously) to lower the cost of medical care because the doctors could charge based upon a combination of their medical school and experience (a Wal-Mart doctor from Arkansas would presumably charge less than an Ivy-League type). The increased spectrum of pricing would allow for the medical profession to extract the greatest profits possible.
As a side note, it is presumable that many Med schools would still restrict supply because it helps to maintain their exotic/upper crust nature. And odds are that Mayo Clinic physicians would still come from Johns Hopkins and the like...
Posted by: Adam Malone | Dec 13, 2006 10:39:53 AM
Adam Malone: "Currently the AMA controls admissions to every medical university in the country."
Is that true? I didn't think the AMA had anything to do with who gets admitted to medical schools. I know the AMA co-sponsors the Liason Committee on Medical Education, which accredits medical schools. Are you saying that the AMA controls the number of admissions by limiting the number of accredited medical schools?
As most medical schools are state-funded, wouldn't it be the state governments that limit the number of medical schools?
Posted by: JohnDewey | Dec 13, 2006 10:56:25 AM
The AMA, as co-sponosr of the LCME, has influenced the number of medical schools. However, they are not involved in accrediting schools of Osteopathic Medicine. The American Osteopathic Association accredits those schools.
Osteopathic physicians - and hospitals - do provide a legal alternative to the AMA "monopoly" that economists often decry. I know that licensing boards in many states contain D.O.'s as well as M.D.s.
Posted by: JohnDewey | Dec 13, 2006 11:17:16 AM
I'm not sure I understand the relationship of Dean Baker's scheme with respect to immigration. Many of these professions, such as doctors and at least some types of lawyers, need to be practiced locally. Are we throwing our borders open to all "professionals".
Is a plumber a professional? (They seem to think they are). Would we allow anyone who qualifies anywhere as a plumber to come work here?
Someone from a poor country is better off working in the United States at some so-called profession at just about any price. The ability to have your children born here, attend 1st world schools, have access to 1st world health care, etc. are worth more than they would make in the home (poor) country.
Maybe that's fair, but maybe not. If we say, oh, just foreign doctors are allowed but nobody else, then were not really addressing Baker's problem very thoroughly. If we allow those who're qualified for any "profession" in, expect hundreds of millions to show up in short order.
Open trade with closed immigration borders is what economists generally push for. Open trade with open immigration (or open legal residence) is a totally different thing. I can see why few people, including the poor, push for the latter.
Posted by: Bret | Dec 13, 2006 12:27:27 PM
So, how about writing a newspaper/magazine column on the protectionist barriers of professionals? Surely it's What Bastiat Would Do.
Posted by: TGGP | Dec 13, 2006 12:33:04 PM
Here is a quote from Friedman that I found at the Von Mises Institute:
"To return to medicine, it is the provision about graduation from approved schools that is the most important source of professional control over entry. The profession has used this control to limit numbers." Blocking entry is much more effective than just raising the real price of a medical license; the "far more important" measure is "establishing standards for admission and licensure that make entry so difficult as to discourage young people from ever trying to get admission"
For the full story go here:
http://www.mises.org/story/1547#_7_
Sorry I misstated that the AMA directly controls the number of students, they control the accreditation of those schools. So I should have said that they INdirectly control admissions.
Posted by: Adam Malone | Dec 13, 2006 12:42:29 PM
If we start importing large numbers of doctors, won't that have a ripple effect up the doctor-producing chain? That is, won't that make doctoring less attractive as a profession, leading to fewer applicants for doctor school? And, won't that and other factors lead to U.S. doctor schools shutting down? And, won't that lead to even more importation of foreign doctors? And, won't all that lead to the U.S. losing the edge in doctoring to other countries?
I fully expect a "free trader" to now sing the praises of that.
Posted by: The FederalReserve Is Corrupt | Dec 13, 2006 1:56:40 PM
The person brings up a good point. For all the bashing unions get around here, few people realize that professional organizations, especially the different state Bars and Boards are huge union-like entities. They promulgate rules for entry, how to act once you're a member, affect legislation, and threaten to take away your license if you act up against them. Some states require you to be a member of the bar to practice law.
While these areas are probably over-regulated, the regulation does do an ok job of ensuring a certain amount of competence. In emergency medical situations, and when an innocent person gets appointed a public defender, those licensing requirements are no small comfort. Of course, those are probably the two most extreme examples, with many more instances where the licensing requirements are way too high and restrictive to handle run of the mill divorces, child custody hearings, routine medical check-ups to play High school tennis, etc.
Posted by: Bill | Dec 13, 2006 1:58:44 PM
Adam Malone: "they control the accreditation of those schools. So I should have said that they INdirectly control admissions"
I still think control is too strong a word. If another state university in Texas builds a medical school, the AMA co-sponsored accrediting agency, the LCME, cannot arbitrarily deny it accreditation. The real control, I think, is with state governments that fund those schools. Of course, all doctors, not just those 50% in the AMA, can influence legislators through their contributions. But insurance industry lobbyists can so as well.
As I said before, the LCME does not accredit schools of osteopathic medicine. So the AMA has no "control" at all over those schools.
Posted by: JohnDewey | Dec 13, 2006 2:21:38 PM
This is to "The Federal Reserve is Corrupt"-
The ripples that you speak of will only impact those doctors that offer the same service as the "imported" doctors.
If a US educated Dr. offers the same service as one from Bangalore, it will most likely "hurt" him. However, the exportation of medical services that the US now experiences is primarily in cases where specialization is required.
Cancer treatment is a good example of this. If that treatment were available in their home countries the people would most likely have obtained it there. Because the vast majority of people tthat come to the US for treatment are the most wealthy, it can easily be assumed that if that same treatment were available in their home country they could have and would have obtained it there.
The ripple effect you mention would very likely result in increased specialization by US Doctors.
Posted by: Adam Malone | Dec 13, 2006 2:23:03 PM
Bill: " threaten to take away your license if you act up against them."
How could the AMA do that? The AMA definitely does not license physicians. Neither are they empowered to take disciplinary action against physicians.
In some states, MD's do not even constitute a majority of the license and disciplinary boards appointed by the governor. In every state board I've looked at, at least one-fourth the members are not MD's. The last statistics I read, from 2002, showed that less than 30% of U.S. physicians were members of the AMA. So it's not at all clear the AMA even controls boards where MD's are the majority.
Posted by: JohnDewey | Dec 13, 2006 2:45:54 PM
Rather than bring their doctors here, wouldn't it be cheaper to fly American patients to other countries for hospital care?
Posted by: Kent Gatewood | Dec 13, 2006 3:37:41 PM
"wouldn't it be cheaper to fly American patients to other countries for hospital care?"
Well, as an international airline employee, I'd certainly love to see the additional revenue. But I'm not sure patients requiring serious surgeries would be allowed to travel on lengthy trans-oceanic flights. Airlines incur large enough costs as it is when planes are diverted for illnesses of healthy passengers.
Posted by: JohnDewey | Dec 13, 2006 3:50:24 PM
Dean Baker seems to think that lowering barriers to entry for high wage workers would cut their wages and increase everyone elses. I disagree. The world economy now workers on a winner take all model. If the supply is increased, it will lead to a greater differentiation of compensation, but not in prices. You can get a cheap accountant, but then the IRS will be knocking on your door. You can hire a cheap doctor, but then he may inject you with something poisonous by accident, or amputate the wrong part of the anatomy, etc. As such, the real gains coming from cutting protection for high wage workers is for people who originally could not compete who are then go to the top, and corporations who can make some professional tasks more routine and hire workers who are mediocre for less. No where in this equation do lower paid people benefit, unless they want to accept higher risk for bad service.
Posted by: Alex | Dec 13, 2006 4:19:16 PM
It's common for partisans of all stripes to ascribe motives to their opponents that just aren't the case. Dean seems to believe that believers in free trade/free markets only hold these beliefs as a means to suppress...umm somebody... the poor or blue-collar or something. It is this misconception that makes his arguments so odd in the sense that he seems to expect to find libertarians(?) opposed to them.
Any trade or regulatory barriers Dean wants to tear down are okay with me.
Posted by: Rob | Dec 13, 2006 4:21:00 PM
I've been following this thread about professional regulation (i.e. law & medicine), immigration & WalMart University - and I fail to see why there's such a problem.
Professional regulation - when it's compulsory - is like any other statist invention: reducing freedom. To argue otherwise is unconvincing. However, as a consumer of medical services, I AM interested and concerned that my provider has undertaken sufficient study and has accreditation. I'd much prefer those accreditations be more like the PMI/PMP or MCSE - optional, meaningful and not state-sanctioned. Providers who fail to demonstrate their bona fides (who SHOULD be permitted to practice, BTW) would experience less demand than those who DO have provable education/experience. This perspective is already visible in the marketplace (where competition is open) - just look at the premium PMP's receive over non-certified project managers. (Sorry if this isn't a perfect analogy, it's still good enough for the purposes of discussion).
As for legal services - the same should apply. Mandatory membership in the state bar is just another extortion by the state, or a state-like entity (like unions). Now if my lawyer WAS bar-certified, from a highly-respected school and associated with respectable accreditations, I'd take that seriously - but the state bar monopoly is essentially meaningless (thus reducing it's nominal value to the consumer).
For other highly paid professions, I say: Bring on the competition.
There is almost no meaningful barrier to entry for information systems professionals in this country. A discussion of immigration (f)laws is meaningful, but not relevant as a true barrier to entry. Wages in most (I say *most*) sectors of IT are signficantly above average, typically increasing and likely to be in great demand. In this market alone the addition of many more providers (i.e. people) has not diluted demand - or high wages - at all.
In my field (financial computer consulting) I see increased specialization giving huge competitive advantage - and the wages that come along with it. Yes, it means a consultant has to continually improve, but that rule applies to everyone, so consultants just need to exercise improvement a bit more proactively to retain the "edge".
Bring on the competition - I honestly don't believe those folks behind state-enforced licensing are doing their "members" a good turn.
As far as WalMart University is concerned: You get what you pay for. We functionally HAVE WallyU right now: ITT Tech & University of Phoenix serve that market nicely. Low price (relatively) and easy admission.
There will likely always be a premium for a Harvard graduate over a University of Phoenix graduate. I call that a market-based perspective if ever there was one.
No one is forced to pay a newly minted MBA from WalMartU a living wage - just as no one is forced to pay a Dartmouth MBA a six-figure starting salary. Part of the "marketability" of an MBA is individuality: What does the person bring to the job. Increased competition from WalMartU won't change that significantly. Part of the attractiveness of an untried an inexperienced MBA is the perceived quality of the education they receive. WalMartU is highly unlikely to rate comparably with the best colleges and universities - no matter how cheap their education.
Further to that, I doubt there is much utility in creating WalMartU as that role is adequately filled by the massive community college system available in every state. Don't community colleges offer a reasonably-priced education that is open to virtually everyone? (Yeah, "reasonably priced" is subject to interpretation - but they are still cheaper than Ivy League).
So, I think we already have WalMartU, and open competition in most highly paid professions. Obligatory professional licensing is a throwback, but voluntary professional accreditation is unlikely to diminish any time soon.
Posted by: faultolerant | Dec 13, 2006 5:55:02 PM
Two things on this... The green card restrictions are unenforced to the point of being non-existent. A particular person may have a particular skill or experience that you'd never find in just those proportions in an American citizen. I've seen it in every position imaginable in a startup, and it can be as minor as "experience with our product". If you have an H1-B slot and a decent lawyer, you can get the foreigner you want for $8-$10K.
The other thing is Dean's request of a list of requirements that a Mexican can check off to be qualified for a particular job. There are fewer and fewer high paying jobs where you can do that. I think what he's doing here is mixing apples and oranges. I.e. talking about the $200K per year private practice attorney for the salary, but talking about the cubicle attorney making $80K for the opportunity.
In fields where the work product is from the mind, the more suppliers you bring to the table, the more disparity in price you're gonna find. You may be able to commoditize a portion, even a large portion, of the industry. But you'll never do it with the niches, and these will be the realms of super-competent super-creative entrepreneurial risk takers. There is no degree in being F. Lee Bailey, Steve Jobs, Jack Welch, or Tom Peters. Deosn't matter if you're American or Elbonian, it just doesn't exist.
Posted by: Brad Hutchings | Dec 13, 2006 7:31:52 PM
The AMA owns and controls the payment codes for medical services. These codes are sold to Medicare, Medicaid and other private thrid party payors. These codes are fiercely protected by the AMA general memebership and by the subspecialty subcommittes within the AMA.
Once the AMA sells the codes to Medicare it then "consults and advises" Medicare on the appropriate fees for each code. Because Medicare is by far the largest third party payor its fee scheduled is followed closely by the private health insurers and other third party payors.
If this current fee setting arrangement between the AMA and Medicare is not changed
then you will never see competitive pricing. So competition really won't help.
Posted by: John Booke | Dec 13, 2006 9:36:38 PM
John Booke: "So competition really won't help."
Perhaps not immediately for the major healthcare treatments. But costs for minor care will be nosediving now that WalMart and Target have entered the industry. Below is a link explaining how the big retailers use Nurse Practitioners to dramatically lower costs. Some average treatment prices: strep throat, $59; ear infection, $49; sinus infection, $49.
http://66.23.131.98/archive/2006/dec/clinics.txt
Posted by: JohnDewey | Dec 14, 2006 12:49:04 PM
Minute Clinic operates many of the small clinics in WalMarts and Targets. I like their motto:
"You're sick. We're quick."
Posted by: JohnDewey | Dec 14, 2006 12:53:12 PM
Suppose anyone were allowed to practice medicine without accredidation. Would they all have the priviledge to perscribe drugs to their patients? Assuming we do not want everyone to have access to every drug, how would the state decide who is allowed the keys to the medicine cabinent? We'd be back to square one.
Posted by: Adam | Dec 15, 2006 9:49:27 PM
Posted by: laptop battery | Oct 13, 2008 2:36:08 AM
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